Saturday, May 31, 2008

A common disclaimer for financial results is "Past results do not guarantee future performance," indicating that it is difficult to predict the future returns of any investment. While this statement may be true for financial matters, I have found that the opposite is true in other areas , such as businesses or individuals. When dealing with companies and people, past results often predict future performance:

Company behavior - How a company interacts with its employees or customers generally predicts what will happen in the future. Usually, when a company treats me well, I continue to be treated well over time. However, when I receive unsatisfactory treatment initially, I continue to be disappointed with future interactions. While this observation is not 100% correct, I have found the correlation happens often enough to base a decision on the first interaction.

In my younger days, I would give companies a second chance, hoping that they might change, because I got a good deal in another area. Nowadays, I just switch companies, even if I lose the benefit I liked. First, it is not my job to train a company to treat me well. Second, I no longer have the patience to work with a company who gives bad service.

Individual behavior - I think people are generally hard wired to behave the way they do, with changes not being likely, especially for adults. For example, reliable, hard working or diligent people tend to be consistently reliable, hard working or diligent. People that miss deadlines, do minimal work, or are rude to co-workers, tend to consistently do so.

In a company, since we ultimately had to continue working with each other, we used "performance appraisals" to help the individuals improve their performance. However, in my experience, often there was no change in an individual's behavior or performance.

So now, when I work with someone or a company, I believe that "past results often guarantee future performance." I now try to avoid working with those where I think their past performance does not meet my standards of "good." This approach works well for me whether a person or a company, and especially those running for elected office.

For more on Reflections and Musings , check back every Saturday for a new segment.

Friday, May 30, 2008

Since retiring in my forties in 2007, I've been expecting to to do more sports and yard work. However, I have learned quickly that my strength and stamina is not what it used to be :-) While I haven't really noticed, my physical fitness has been steadily declining since graduating from college, where I played football and rugby.

In my early twenties, I was proud of the fact that I could play two games of rugby on Saturday, and feel pretty good by Sunday. By my early thirties, I was playing one game on Saturday. It was taking me until Tuesday to recover and I knew it was time to retire. However, I still was in good enough shape to run a marathon for the first time and play touch football competitively with high school athletes. However, by my late thirties, I had retired to recreational volleyball and softball and by my mid forties, I was only playing tennis occasionally.

This natural decline is strenuous physical activity has had its effects. Recently, a few activities demonstrated my decline in fitness. A few weeks ago I played a round of golf (walking) and then played tennis that evening. Although I made it through both activities, I was very tired by the end of the day. Then yesterday, we spent the day pruning bushes, and trimming trees. By end of day, my joints were sore, and I didn't have the strength to use the trimmer for the thicker branches.

I have avoided weight training most of my life, even when I played football. However, I expect I will need to make weight training part of my regular routine as I get older. The other addition is likely going to be flexibility training. By doing both, I expect to improve strength and reduce injuries, which now seem to take longer for recovery. My main challenge will be to make weight and flexibility exercising enjoyable enough to do it regularly :-)

For more on Reaping the Rewards , check back every Friday for a new segment.

This is not financial or exercise advice. Please consult a professional advisor.

Thursday, May 29, 2008

Several years ago, my nephew began to regularly beat me in video games, even when I had the higher ranked character. This week I lost another "advantage" over my nephew, who is now 15 years old. I can no longer defeat him in one-on-one basketball. His skill, quickness and strength now exceed mine by a noticeable margin. In sports, I am now a peer, and no longer the uncle he strives to beat. It won't be long before he graduates from high school, attends college, gets a job. I can't believe how fast time has passed. In eight years, he will be in the workforce, replacing those of us that have retired.

In the past, I sometimes regretted seeing those younger than me surpass my skills and accomplishments, because it meant I was "beaten ." However, since retiring in my forties in 2007, I take a more philosophical view on the process. I now realize that progress requires that people keep getting better than those before them. Thus, I look forward to passing the baton and having those younger than me, especially my daughter, do much better than I did. After all, a good baton pass means it will be a better world.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial or family advice. Please consult a professional advisor.

Wednesday, May 28, 2008

"Every system is perfectly designed to get the results it gets" - W. Edwards Deming

Mr. Deming is the quality control expert credited with helping make Japanese products achieve the high levels of product quality and consumer satisfaction. He always drove home the point that quality couldn't be managed and that it needed to be built into the manufacturing processes.

He was famous for demonstrating the point through a box of white beads with a specific percentage, say 8%, of defective red beads. Using a paddle designed to withdraw 100 beads, he would exhort the seminar participants to take out 5% or less defective beads. In most cases, the number of red beads would be above 5%, resulting in a chastising for the volunteer. Every so often, a volunteer would achieve 5% or less red beads and he would be "rewarded" for meeting criteria. For this situation, students of statistics know that 5% was a random occurrence and not likely to be repeated often. The only way to achieve 5% defects in the long term is to have a system with 5% or lower red beads in the box.

For me, designing a system that delivers the results that one wants can also be used in personal finance. In this case, the system is a habit. From my experience, habits are low effort and sustainable, while special actions require ongoing effort and attention. For example, to reduce spending I set aside a part of each paycheck for savings, and lived on a cash basis until the next paycheck. The habit allowed me to spend only so much, unless I dipped into savings, which happened on rare occasions. This habit change worked better for me than special actions such as tracking money spent, no spend days, or detailed budgeting.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

Tuesday, May 27, 2008

ATM fees cost consumers more than $4 billion in 2007. The main charges were for using other bank or out of network ATMs.

Personally, I hate to pay to use my own money. My solution is to use a bank that doesn't charge ATM fees and reimburses fees charged by other banks. Here is a list of financial institutions from FatWallet.com that provide free (limited and unlimited) ATM withdrawals. In some cases, there are restrictions or qualifications. Although the list was published in June, 2007, it can still provide a good starting point for finding fee free ATM cards .

For more on Ideas You Can Use, check back every Tuesday for a new segment.

Monday, May 26, 2008

With the market decline of early 2008, these stock purchase updates have not been as fun to write. However, I am going to remain disciplined and do a weekly update until I sell the positions from the portfolios. The original portfolio was based on a 10/15/07 updated buy list of Potash (POT), Southern Copper (PCU), CNH Global (CNH) and BHP Billiton (BHP) and a January, 2008 stock pick update of Apple (AAPL), Research in Motion (RIMM), Intuitive Surgical (ISRG), Priceline (PCLN), Core Labs (CLB), and Google (GOOG).

The overall portfolio lost 3.1% last week and now has total return of 18.0%. I sold 25 shares of Priceline.com for a 43% gain. All three of the remaining holding fell this week. Here's the current status of the stocks in the portfolio:

*On 2/8/2008, the system gave a sell signal for CLB.** On 3/7/2008, the system gave a sell signal for AAPL and GOOG. Previously, I had planned to hold GOOG since it is part of my core holdings. However, now I will sell this portfolio's remaining 20 shares (or an equivalent number of shares purchased earlier) of GOOG over the next few weeks, if the shares continue to rally.

The market rally appears to have ended, with indices down over 3%. As of the close on 5/23/08, the Dow, Nasdaq and S&P 500 indices were respectively down 4.92%, 7.83%, and 5.51% year to date, significantly up from lows of 9.37%, 16.58% and 11.86% in my 3/17/08 Stock Purchase Update, but down 3.85%, 3.33% and 3.44% from the previous week.

I continue to believe that the probability of a recession in 2008 is relatively high, if we are not already in one. The multitude of negative factors will eventually outweigh any actions by the government and financial institutions. Originally, the Fed interest rate cuts and other actions led me to expect that the bull market would last through summer, 2008. However, the economic data in early 2008 has caused the bull market to end earlier. For either case, I expect the market to continue to be choppy in 2008 with many short term rallies and declines. For now, I do not plan to add any more to the amounts that I have already invested in the above tables and will be looking to close out positions, even without a sell signal. I will take some profits on long term gains at a 0% tax rate on Potash and Google when possible.

Full disclosure: I own all the stocks mentioned in this post that are not indicated as sold.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Sunday, May 25, 2008

Prior to becoming the Fed chief, Ben Bernanke was the economics department head at Princeton University. During his tenure, a team was formed to study economic bubbles, i.e. why they form, how they collapse, and, interestingly, how to profit from them. The findings of their study are summarized in Bernanke's Bubble Laboratory by Justin Lahart in The Wall Street Journal. Here were my takeaways on why bubbles form and persist from the article:

Optimists dominate. The article concludes bubbles form with developments that potentially have far reaching effects, e.g. automobiles in the twenties and more recently the Internet and finanical innovations, and there are extreme differences in opinions between bullish and bearish investors. However, as the bubble grows, optimists become the dominant investor group.

Pessimists leave the market because they have or expect signficant losses. Being bearish, one can short stocks, buy puts or stay out of the market. As the bubble builds, shorting stocks or buying puts can result in significant losses. Eventually, the pessimists lose enough money and exit from the market, leaving optimists to drive up the market.

Interestingly, the article proposes the best way to profit from a bubble is to participate, and to exit when the bubble has run it's course. According to the article, a major indication of a bubble is that "people pay a crazy price and people trade like crazy." However, there was no mention of a similar indicator for a bubble about the burst. Thus, while recognizing a bubble is possible, exiting before a major downturn may be very hard to do.

While I usually avoid investing in bubbles, I think I'll try to profit from the next one, on a very small scale. To limit potential losses, I will allocate no more than 5% of our savings in a "bubble" investment area. The limit will also serve as a mechanism to lock in gains, since the investment will need to be sold off periodically to keep amount below 5%. In addition, I believe short term (i.e 10 day and 50 day) moving averages can be used to determine when a decline may be happening. By selling when the bubble price crosses below both these moving averages, I think I may be able to get out before a signficant decline. The key will be the ability to emotionally accept selling at a price below the near term high.

For more on New Beginnings , check back every Sunday for a the next segment.

This is not financial or investment advice. Please consult a professional advisor.

Saturday, May 24, 2008

The Fort Worth police recently arrested a man accused of trying to cash a $360 billion check. The police reported that he stole the check from his girlfriend's mother and made it out to a company he was planning to start.

I have to give him credit for thinking big:-) The check amount was greater than the $62 billion net worth of Warren Buffett, the world's richest individual as of February 11, 2008. In addition, the amount was more than the revenue of any one corporation in the 2008 Fortune 500 except for two, Wal-Mart and Exxon.

Friday, May 23, 2008

In 2007, we made a big life decision and I retired in my forties. Since we were a single income family, an important part of the process was to determine whether we were financially ready for me to retire. In hindsight, I am confident we made the right decision, even with the economic uncertainty that exists today. Looking back, here are the elements that enable us to say "yes" to an early retirement decision.

Satisfied with lifestyle. We were happy with our lifestyle, which we consider comfortable and not extravagant. We don't expect any major increase in lifestyle expenses (e.g. more expensive home) and we're not big fans of acquiring things to signal wealth (e.g. expensive cars).

Only needed 80% of income. When I was working, we were saving about 20% of my salary and living off the rest. In addition, we had no debt other than the mortgage for our house. Making lifestyle and spending choices from the very beginning helped us do this.

Saved 20 times income. In my earlier research, I estimated that savings (e.g. taxable accounts, 401Ks, and IRAs) equal to 20 times my salary would be needed to retire early. I later confirmed the amount via my financial advisor, who used a Monte Carlo analysis to arrive at the same conclusion.

Good health and good health insurance. We are fortunate to be in good health. Also, I qualified for my company's retiree health insurance, which is the same coverage as for employees, but at a slightly higher cost. It would have been tough to retire without this benefit.

Of note, our situation is different than most retirees since we have a three year old child. However, we still feel that meeting the above criteria will enable us to have a good lifestyle in retirement for the next 40 years. Of course, even though we are confident in our analysis (and assumptions), there are no guarantees in life and we are prepared to return to work if needed.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

Thursday, May 22, 2008

I recently saw a retired colleague and his wife at a financial seminar. In conversation, they shared that they helped their kids manage finances by paying their advisor to also handle their children's accounts. There were two major benefits with this approach. They knew their children were getting good financial advice and the kids were more open to direct guidance from someone other than their parents. A win for both sides.

Using a third party expert to provide training is appealing, especially when the options are becoming more complex. An article in yesterday's Wall Street Journal shares how students at Johns Hopkins University are enrolling and benefiting from a personal finance course. Third party expert training for one's children does have its precedence, e.g. education and individual coaching for a sport. When our daughter approaches college age in the distant future , it will probably worth considering some "formal" personal finance training from our finanical advisor.

For more on Crossing Generations, check back every Thursday for a new segment.

Wednesday, May 21, 2008

Financial decisions based on a single scenario can sometimes be disastrous if the assumed scenario proves incorrect. Here are some recent examples of single scenario situations which turned into crises.

Tech and Internet stocks can only go up.

House prices will only continue to go up.

Securitized debt has much lower risk that the individual loans.

We all know how these have turned out with the bursting of the tech stock and housing bubble and the current mortgage crisis. The consideration of multiple scenarios may have helped avoid some, but not all, of the issues experienced.

Of course, one can argue hindsight is 20/20:-) So I will provide an example, where the outcome is not yet determined, the current stock market direction. As I wrote in Time To Increase Cash Position, I believe the stock market is likely to go down in the short term. If I was 100% sure of a decline happening, I would sell all my stocks. Of course, I have also considered that I may be wrong and the market will advance.

To manage for the two possibilities, I have decided to sell stocks in my personal investment account, but leave the majority of the funds with our financial advisor invested in stocks. In addition, I have sold out of the money covered calls on some stocks. Thus, if the market declines, I have preserved some of the gain from March to May, 2008. If the market advances, I will still participate in the gain. For the scenario where the market declines significantly, e.g. over 20%, in the next few months, we have purchased a small amount of a bear market fund, which will have returns opposite to the market direction.

The consideration of these two scenarios has allowed us to design an investing strategy that partially benefits if either should happen. While this strategy will not gain as much as a strategy based on a single scenario, it also minimizes the losses (or missed gains) should I be wrong. Another benefit is that I worry less, have less stress and sleep better at night :-)

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

"Think of the true cost." I didn't understand this one until much later in life. Most of what I have acquired, house, car, collectibles, and other things all have an after purchase maintenance cost. Nowadays, I will choose to rent versus own for items I use infrequently.

"Live within your means." Simple, timeless, and absolutely essential.

"Don't pay interest on anything that loses value." Definitely agree for credit cards. In my twenties, I had taken loans for a house, car and education, and would do so again. Nowadays, we pay cash for our cars and plan to fund our child's college education by saving from the time she was one.

"Don't co-sign a loan." I would co-sign on certain loans, if I received ownership interest, e.g. a home. My parents "co-signed" my first home mortgage. In return, they owned 50% of the of the house. I paid them rent equal to 1/2 of the mortgage and property taxes. Thus, I did cover 100% the loan and they never paid any money.

I would not co-sign a credit card or a car loan.

"If you need more money, then go out and make more money." I attended college in order to get a higher paying job. About the middle of my career, I also learned it was beneficial to usually accept the offer from the higher paying job.

Increase one's effectiveness by outsourcing important work to those with greater expertise or efficiency. Although directed at small business owners, it can also apply to personal finance. I use a financial advisor because he can analyze a wide range of investment opportunities more efficiently than me. I know others who use a tax advisor for the same reasons.

"Own your own business -- including the building it's in." I've never had my own business on which I depended for my livelihood. However, I do know that two of my dad's best investments were real estate properties.

"Don't gamble more than you can afford to lose." This is a great tip. For me, fear resulting from risking something I can't afford to lose often causes me to make less than optimal decisions.

Don't hope for luck or others to solve one's financial issues. It's better to learn good financial skills and avoid the issues. Otherwise, one may never become competent in personal finances.

Monday, May 19, 2008

With the market decline of early 2008, these stock purchase updates have not been as fun to write. However, I am going to remain disciplined and do a weekly update until I sell the positions from the portfolios. The original portfolio was based on a 10/15/07 updated buy list of Potash (POT), Southern Copper (PCU), CNH Global (CNH) and BHP Billiton (BHP) and a January, 2008 stock pick update of Apple (AAPL), Research in Motion (RIMM), Intuitive Surgical (ISRG), Priceline (PCLN), Core Labs (CLB), and Google (GOOG).

The overall portfolio gained 1.5% last week and now has total return of 21.1%, due to the strength of Potash. I sold 10 shares of Google and did not sell Priceline.com as planned. Here's the current status of the stocks in the portfolio:

*On 2/8/2008, the system gave a sell signal for CLB.** On 3/7/2008, the system gave a sell signal for AAPL and GOOG. Previously, I had planned to hold GOOG since it is part of my core holdings. However, now I will sell this portfolio's remaining 20 shares (or an equivalent number of shares purchased earlier) of GOOG over the next few weeks, if the shares continue to rally.

The market rally appears to have resumed, with indices up 2 to 3.4%. As of the close on 5/16/08, the Dow, Nasdaq and S&P 500 indices were respectively down 1.1%, 4.65%, and 2.15% year to date, significantly up from lows of 9.37%, 16.58% and 11.86% in my 3/17/08 Stock Purchase Update, and up 2.02%, 3.41% and 2.74% from the previous week.

I continue to believe that the probability of a recession in 2008 is relatively high, if we are not already in one. The multitude of negative factors will eventually outweigh any actions by the government and financial institutions. Originally, the Fed interest rate cuts and other actions led me to expect that the bull market would last through summer, 2008. However, the economic data in early 2008 has caused the bull market to end earlier. For either case, I expect the market to continue to be choppy in 2008 with many short term rallies and declines. For now, I do not plan to add any more to the amounts that I have already invested in the above tables and will be looking to close out positions, even without a sell signal. I will take some profits on long term gains at a 0% tax rate on Potash and Google when possible. I still may sell Priceline.com before my system issues a sell signal.

Full disclosure: I own all the stocks mentioned in this post that are not indicated as sold.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Sunday, May 18, 2008

It's been been over 8 months since I retired in my forties in October, 2007. Originally, I don't think many people thought I had really retired. Conversations often were about job opportunities or what job I was doing next. People were often surprised when I said I wasn't actively looking.

After 8 months, I think people now believe that I really have taken the leap to retirement and the conversation topics are shifting. Recently, as I was playing outside with our daughter on a weekday afternoon, a neighbor commented how great it is that retirement enabled spending more time with our child. Yesterday, the mom of a daughter's friend mentioned her husband would love to retire like I have.

In hindsight, I guess the original reactions aren't surprising. After all, I only know of one other person who retired in his forties. I hope I will be able to set a positive example that others can follow :-)

For more on New Beginnings, check back every Sunday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

Saturday, May 17, 2008

To me, most of them are irresponsible spenders of my tax dollars. The recently passed $307 billion farm bill is just one more example. It contains $43 billion in crop subsidies and $27 billion for farmers to "set aside or protect environmentally sensitive land," according to an AP article.

In today's market, there doesn't seem to be any need to subsidize farming. Many grain prices are at or near all time highs and yet Congress continues to subsidize crops such as corn, wheat, soybeans and rice. With high prices and a global food shortage, I also don't understand the need to pay farmer to idle land. However, the farm bill passed with more than two thirds of the House (308 - 116) and Senate (81-15).

"Although neither senator showed up for Thursday's vote, McCain went to Iowa, the heart of farm country, this month to announce his opposition to the bill. On Thursday, he called it 'a bloated piece of legislation that will do more harm than good for most farmers and consumers.'

Obama came out in favor of the farm bill Thursday after failing to vote on a previous version when it passed in November.

Friday, May 16, 2008

Since retiring in my forties in 2007, I've come to realize that retirement is more than finances and leisure. In fact, retirement is the beginning of a new life phase, with its own set of rewards and challenges. In addition, each person's situation can be unique, with little guidance to be had from friends or the literature, which makes retirement, especially early retirement, a new frontier for many people. For reference, my definition of retirement is when one can depend primarily on savings, social security and/or a pension for income. Here are the questions I believe make retirement a new frontier:

Will we outlive our nest egg?The Wall Street Journal Encore Quiz shared an interesting statistic on time spent in retirement. For retirees at age 65, the average time spent in retirement is about 22% of one's life, assuming the average life expectancy of 83.7. I retired in my forties in 2007 and life expectancy tables show that people of my age would be expected to spend 38% of their life in retirement, which would be more than the time I spent working. If my health continues to be good, I hope to spend 50% or more of my life in retirement:-)

Although the calculated probability is excellent, it isn't certain that our savings can completely cover us for another 1/2 of our lives. For example, inflation could become much higher, the stock market could crash and not recover for years, or the U.S. could experience a severe recession.

What meaningful contributions do we want to make in retirement? For many new retirees, retirement won't be about rest and leisure, but about shifting to more meaningful and fulfilling interests as described in "Retirement': The new dirty wordand Get your dream job ... at 55 A similar question is, "How do we want to be remembered?"

For now, our focus is on raising our three year old daughter. After that, I think we will give some consideration to trying our dream jobs.

How will we maintain control of our lives as we get older? I've noticed it is more difficult or takes more time, than when we were younger, to do many of our tasks and activities. Although our overall capabilities are still excellent, I expect that they will decline as we get older.

We have already started outsourcing some of our activities such as cutting the grass. We are working to identify good companies to provide services for other routine maintenance. Hopefully, services for retirees will continue to expand, to the point of including convenient public transportation that we experienced when we lived in Japan.

Early retirement used to be all about the finances. Can You Afford To Retire By 55? is an example of the types of articles covering the financial aspects. Today, I think getting the finances right is only the beginning, with many more challenges and adventures to follow.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

Thursday, May 15, 2008

I recently attended a presentation by David Solie, who wrote the book HOW TO SAY IT to Seniors. In his talk, he noted that the elderly have agendas that are very different from those that are younger. While the agenda of younger people is primarily success (in business, career, etc.), the agenda for seniors is much different and focuses on two areas:

Maintaining control. As one ages, one begins losing capability to do tasks that once were routine. As physical, financial, and maintenance tasks become more difficult, others offer to do them, with good intentions of helping. However, often the interaction becomes a frustrating battle, with the older person resisting and the younger person pushing.

In addition, one loses the social networks that were established over lifetime as family and friends pass away.

Creating a legacy. Older people are more reflective, using social interactions as an opportunity to review their lives, searching for meaning in what they have done. In addition, there is a desire to create the legacy by which they will be remembered.

Mr. Solie's point is that understanding these two agenda items of the elderly can significantly how one communicates with them. I could relate well to these points that Mr. Solie shared, based on my experience with my parents.

Over the past 10 years, I noticed how my parents weren't as quick to do everything they once had done, ranging from routine daily tasks to unfamiliar new tasks. My dad who was a do-it-yourselfer all his life, was letting minor repairs go undone. My mom was taking 2, 3 and even 5 times longer to keep her house clean, which she passionately did all her life. Neither of them wanted to "outsource" work that they had done for years, whether it be tax preparation or yard work. I used to think it was because of cost, and now I realize it was to avoid loss of control. I understand better now why my mom initially refused to go to assisted living, even though she loved after going there.

As my parent passed their sixties, the number of friends and siblings began decreasing at a faster rate. When my father passed away two years ago, less that half of his 12 siblings were still alive and only long time friends were remaining. All of my mom's long time friends and about half of her eight siblings have passed away. None were able to make it to his funeral due to distance and declining health.

As for legacy, I didn't have the benefit of Mr. Solie's insights before my father passed away. However, in hindsight, my dad was able to create and share the legacy he wanted with us. I will always remember him as doing what was best for his family. Even during the extended illness from which he died, he spent most of his remaining time making sure everything would be OK for his family, especially my mother. I can even see this principle driver in the stories my uncle has told me about my father's youth.

Fortunately, I still have time with my mom to talk to her about her life and to discover her legacy. I look forward to the time with her.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial or family advice. Please consult a professional advisor.

Here's a great way to get a bonus for something your child is already doing this summer. Barnes & Noble is doing a promotion from May 29, 2008 to September 2, 2008 called Summer Reading with Andrew Clements. Eligible participants are children in grades 1-6. Each child who reads any eight books and has it validated by their parents can receive a free paperback from Barnes & Nobles. In addition, your child will be entered in a contest to receive an autographed copy of an Andrew Clements book. Here is the form to participate in the program, or check the information at the Barnes & Noble website

For more on Crossing Generations check back every Thursday for a new segment.

Wednesday, May 14, 2008

Here is a nice calculator from Bankrate.com on calculating loan payments and amortizations. As I wrote before in Personal Finance Math, an equation that one should know is for loan amortization. For those that prefer not to work with the math, this calculator can provide the following:

Monthly payments, with interest and principal breakouts.

The impact of increasing monthly payments or making regular payments to reduce principal.

Enjoy!

For more on The Practice of Personal Finance , check back every Wednesday Thursday for a new segment.

Accelerate slower. I usually accelerate to the speed limit quickly. However, this causes the engine to work harder. By accelerating slower, I can reduce the amount of gas used by the engine.

Coast when a stop is likely. I often continue to step on the gas pedal until it is necessary to use the brake. By taking my foot off the gas pedal earlier, the car slows down and I save gas. A corollary to this is to coast when going down hill.

Drive at 55 MPH on the highway. Higher speeds are less gas efficient. For local destinations, driving faster only saves 5 minutes or less.

While I haven't gone through my first tank yet, I've already noticed a change in my driving attitude when using hypermiling techniques. I'm more relaxed and less rushed when driving to reduce gas usage. Even if I don't get many more miles per gallon, I already have a benefit.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial or driving advice. Please consult a professional advisor.

Monday, May 12, 2008

With the market decline of early 2008, these stock purchase updates have not been as fun to write. However, I am going to remain disciplined and do a weekly update until I sell the positions from the portfolios. The original portfolio was based on a 10/15/07 updated buy list of Potash (POT), Southern Copper (PCU), CNH Global (CNH) and BHP Billiton (BHP) and a January, 2008 stock pick update of Apple (AAPL), Research in Motion (RIMM), Intuitive Surgical (ISRG), Priceline (PCLN), Core Labs (CLB), and Google (GOOG).

The overall portfolio gained 1.1% last week and now has total return of 19.6%, due to the strength of Potash and Priceline. Here's the current status of the stocks in the portfolio:

*On 2/8/2008, the system gave a sell signal for CLB.** On 3/7/2008, the system gave a sell signal for AAPL and GOOG. Previously, I had planned to hold GOOG since it is part of my core holdings. However, now I will sell this portfolio's remaining 30 shares (or an equivalent number of shares purchased earlier) of GOOG over the next few weeks, if the shares continue to rally.

The market rally appears to be flattening. As of the close on 5/9/08, the Dow, Nasdaq and S&P 500 indices were respectively down 3.07%, 7.80%, and 4.76% year to date, still up from lows of 9.37%, 16.58% and 11.86% in my 3/17/08 Stock Purchase Update, but about the same as the previous week.

I continue to believe that the probability of a recession in 2008 is relatively high, if we are not already in one. The multitude of negative factors will eventually outweigh any actions by the government and financial institutions. Originally, the Fed interest rate cuts and other actions led me to expect that the bull market would last through summer, 2008. However, the economic data in early 2008 has caused the bull market to end earlier. For either case, I expect the market to continue to be choppy in 2008 with many short term rallies and declines. For now, I do not plan to add any more to the amounts that I have already invested in the above tables and will be looking to close out positions, even without a sell signal. I will take some profits on long term gains at a 0% tax rate on Potash and Google when possible. In addition, I may close out Priceline.com this week.

Full disclosure: I own all the stocks mentioned in this post that are not indicated as sold.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Sunday, May 11, 2008

Since retiring in my forties in 2007, I've concluded that retirement is also a new beginning rather than just a finale. It is the beginning of a new phase of life, with different goals and approaches than previous phases. It is much more than the winding down of a career and a transition a lifestyle of enjoyment.

Until now, I've been overly focused on the financial aspect of retirement. After all, this is a personal finance blog about my personal finance experiences :-) Of course, the financial aspects are a very important part of retirement, but it's not the only part. Here are some of the common beliefs about retirement I've heard:

Retirement is mainly about financial freedom. - For me, financial freedom is necessary but not sufficient for a great retirement. I've seen many people who are financially able to retire, but aren't ready to do so.

Retirement gives me time to do all the things I didn't have time to do. - In theory, yes. However, if I wasn't doing them before retirement, it's not likely to start after retirement. I haven't seen many people do a complete makeover after retirement.

Retirement enables me to do more of the things I enjoy. - Yes and many of my colleagues found they can maintain such a lifestyle about a year. After that, they want to do something different. Some have even gone back to work.

I think people are finding that retirement includes the above elements but is also more. I don't know what the "more" is yet, but I have been getting exposed to some ideas recently. I will begin investing more time discovering what the new retirement is about, living it and writing about it on this blog. Hopefully, I will be able to provide some new and fresh insights into retirement.

For more on New Beginnings, check back every Sunday for a new segment.

I owe a lot of thanks to my Mom for my success in personal finance. I developed good skills in spending and saving primarily from the example she set in managing our family finances. Here are the one's that have been most helpful to me:

Thriftiness - Mom always loved using coupons, buying on sale or getting other deals to stretch Dad's income. By doing so, she got the best for the money she had. In addition, she didn't believe in using purchases to show one's affluence.

Saving - Mom always managed to put some money from her monthly household allowance into savings. Over time she saved the down payment for our first house, buying a car with cash, and the down payment for various investment properties.

Her example instilled the habit of saving into me. Just before retiring in my forties in 2007, we were saving about 20% of my pre-tax income. Saving was a big enabler for being able to retire early.

Investing - Mom was a conservative investor. She considered banks risky. Under the mattress was the riskiest investment she ever did. While I never understood why, I believe her family must have had a bad experience with a bank in her youth.

While I do use banks and invest in stocks, her conservative attitude did transfer to me. During the nineties, I invested in very few tech stocks, resulting in a mediocre return for that period. However, being conservative saved me from the 2000-2002 tech stock crash which created significant losses.

Of course, Mom was much more than a financial advisor. She was also a nurse, chef, and household operations manager. And she did a great job at all of them. Thanks, Mom and Happy Mother's Day.

Saturday, May 10, 2008

The stock market results of the last two weeks have left me unimpressed. Currently, the stock market is at one of those critical inflection points where it can go either up or down. Good news from the past few weeks have caused the market to rally, with specific stocks such as Google, Priceline and Apple doing particularly well. The rally has weakened in the past couple weeks and there is also still a lot of bad news being reported, such at American International Group's earnings.

At this point, I believe the stock market is likely to go down, in the short term. Although I have already sold some shares, I plan to further reduce my exposure to stocks by selling more positions in my personal accounts, including some that have not yet received a sell signal. In case my call is wrong, I will continue keep my investments in the accounts managed by our financial advisor, since these are long term diversified holdings.

For reference, I will look to sell shares in Google and, perhaps, Priceline.com. I will wait for Potash to become a long term holding, in early June, before selling any shares. At this point, I don't plan to sell Intuitive Surgical.

Friday, May 09, 2008

The Encore Quiz: How Much Do You Know? at The Wall Street Journal is about how prepared people are for retirement. Of course, since My Wealth Builder is a personal finance blog, I was particularly interested in the financial parts of the quiz.

Here are some interesting answers from the money section:

64% of workers are saving for retirement. Conversely, 36% of workers are not saving for retirement.

23% of workers 55 or over have $250,000 or more in savings, not counting homes or the value of pension plans. In other words, 77% have less than $250,000 in savings.

14% of U.S. households contribute to an IRA in 2006. It surprises me that 86% chose not to get the tax benefits of saving in an IRA.

44% of U.S. households are at risk of not being able to maintain their standard of living in retirement. If increasing health care expenses are included, 61% are at risk.

The last point is especially scary. To me, retirement is definitely not a good time to find out one is living beyond one's means, has too much debt, or hasn't saved enough. While there are no guarantees, spending less (and saving more) seems like a good start for a solution. Personally, I would rather spend less voluntarily while working than to be forced to spend less while in retirement.

Thursday, May 08, 2008

Since our daughter joined our family, we've been consciously attending more local attractions (e.g. zoos, museums, parks) to provide a variety of experiences for her. As a rule, we will purchase an annual membership if the break even point is four or less attendances. However, this is causing us to grow the number of family memberships. Currently, we have annual memberships to the zoo, aquarium, natural history and children's museum, nature center, water park, a children's activity center, and Chinese adoptive family organization.

The annual memberships for the children's activity center and Chinese adoptive family group are low, at about $25 to $30, and covers only the initial membership. Optional activities are discounted for members and can be chosen on an individual basis. We will keep these memberships since the yearly cost is low and we usually do several of the additional activities.

The cost for the other memberships range between $58 and $123, for a total of $485. In ascending order of cost, here are the memberships: aquarium ($58, only for spouse and child), nature center ($70), museums ($115), zoo ($119), and water park ($123). Except for the aquarium, the memberships cover parking, which is typically $4-$6.

Here's how I had been thinking about the ranking the memberships:

Usage - All of the attractions get the minimum 2-4 attendances to payout the family membership with parking. The nature center membership gets the most use and the aquarium membership gets the least use. We have no data on the water park, since this summer will be our first year.

Quality - We think all the attractions cover their area well, both with regular and special exhibitions or events. The zoo, nature center, and museums have additional programs, which are discounted for members. So far we have only done the optional programs with the nature center.

Distance - All the attractions are within a 10 to 20 mile radius from our house, with the aquarium being the furthest and the water park the closest.

Enjoyment - We do enjoy the variety each of family membership provides. Each attraction offers different elements, which are educational, interesting or fun.

Overall, none of the ranking categories eliminated any membership. However, it still feels like five is our maximum number of memberships, and we may not be exploring other attractions as much. So we decided to take a very simple approach to managing the memberships by letting each membership expire, and then join again at the next visit. This has two benefits. First, we will have the opportunity to consider other attractions due to having a "membership slot" available. Second, if we rejoin, our membership time is extended since we won't be paying for the time between expiration and the next visit. Since there is no discount for renewing early, we are not penalized for rejoining later.

For more on Crossing Generations, check back every Thursday for a new segment.

Wednesday, May 07, 2008

Here is a nice compound interest calculator from MSN.com on estimating one's savings in the future. As I wrote before in Personal Finance Math, an equation that one should know is compound interest. For those that prefer not to work with the math, this calculator can provide the following:

Future value of regular savings

Time to reach a savings goal

Amount of periodic savings need to reach a goal

Enjoy.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

Tuesday, May 06, 2008

CNBC.com is sponsoring another Million Dollar Portfolio Challenge from May 12, 2008 to July 18, 2008. This year's contest will involve trading both equities and currency, starting with $900,000 and $100,000 in fictional dollars for each account respectively. In addition, each player will be allowed five portfolios.

Last year's winner used a strategy of buying stocks just before an earnings announcement, with the expectation of positive results. I plan to use a similar approach in one of my five portfolios this time. Buying low priced stocks is another stock selection method I plan to use. Of course, I will also submit selections from my own stock picking method based on The Unemotional Investor.

Monday, May 05, 2008

With the market decline of early 2008, these stock purchase updates have not been as fun to write. However, I am going to remain disciplined and do a weekly update until I sell the positions from the portfolios. The original portfolio was based on a 10/15/07 updated buy list of Potash (POT), Southern Copper (PCU), CNH Global (CNH) and BHP Billiton (BHP) and a January, 2008 stock pick update of Apple (AAPL), Research in Motion (RIMM), Intuitive Surgical (ISRG), Priceline (PCLN), Core Labs (CLB), and Google (GOOG).

The overall portfolio gained 0.8% last week and now has total return of 18.5%, with almost all the remaining holdings all being slightly positive. I decided to sell 10 shares of Google with the greatest gain, missing out on part of the rally this week. Here's the current status of the stocks in the portfolio:

*On 2/8/2008, the system gave a sell signal for CLB.** On 3/7/2008, the system gave a sell signal for AAPL and GOOG. Previously, I had planned to hold GOOG since it is part of my core holdings. However, now I will sell this portfolio's remaining 30 shares (or an equivalent number of shares purchased earlier) of GOOG over the next few weeks, if the shares continue to rally.

The market appears to have risen significantly from the near term bottom. As of the close on 5/2/08, the Dow, Nasdaq and S&P 500 indices were respectively down 2.10%, 8.65%, and 4.21% year to date, still up from lows of 9.37%, 16.58% and 11.86% in my 3/17/08 Stock Purchase Update.

I continue to believe that the probability of a recession in 2008 is relatively high, if we are not already in one. The multitude of negative factors will eventually outweigh any actions by the government and financial institutions. Originally, the Fed interest rate cuts and other actions led me to expect that the bull market would last through summer, 2008. However, the economic data in early 2008 has caused the bull market to end earlier. For either case, I expect the market to continue to be choppy in 2008 with many short term rallies and declines. For now, I do not plan to add any more to the amounts that I have already invested in the above tables and may take some profits on long term gains at a 0% tax rate on Potash and Google when possible.

Full disclosure: I own all the stocks mentioned in this post that are not indicated as sold.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Sunday, May 04, 2008

The recent bubbles and crashes of the stock market, real estate, and securitized debt obligations have led me to the following observation: estimates of the future are often grounded in the present. For example, when real estate prices increased between 50 to 150% from 2003 to 2005 in some cities, people projected those price increases past 2005, and acted accordingly. The same is probably true for the 18% return of the S&P from 1990 to 2000. Unfortunately, this error in estimating the future may cause major issues in assessing risk for the following reasons:

People may underestimate risk when investments are going up. In the late nineties, people were making a killing in the stock market. A couple of colleagues shared that they made $60,000 in one day, or over a quarter million in a year. My guess is that these kind of results were not that uncommon.

Of course, there were pundits calling for a catastrophe, but the average person wasn't. In fact, I remember people talking about taking a second mortgage to buy tech stocks. There were few conversations on whether the market could continue rising and I don't recall any conversations on the possibility of a significant decline in the market, other than for Y2K reasons.

People may overestimate risk when investments are going down. Currently, there are still a lot of people that wary about investing in the stock market. Either they had large losses from 2000 - 2002, or they experienced losses in the recent decline. In addition, the S&P 500 index returns have been flat for the past nine years.

The classic phenomenon is when investors sell their stock holding near the bottom of a decline and just before the market resumes an upward trend.

To help avoid incorrectly assessing risk, a concept I like to use is regression to the mean, which proposes that returns will tend deliver the long term average, in the absence of an causal change. In the case of the stock market, with a long term return of 10%, I believe the last nine years may indicate that the stock market is due for a new upward trend. However, for housing , with a long term return of about 6%, I believe there may be several more years of declines or no increases for some cities, especially ones that had large returns in 2003-2005.

For more on New Beginnings, check back every Sunday for a new segment.

This is not financial, real estate or investment advice. Please consult a professional advisor.

Saturday, May 03, 2008

Advertising is excellent at changing points of view by appealing to a different part of a purchaser's mind. By positioning a product in a new way, advertising can sometimes get a person to buy something they didn't previously consider. Here are some of the mind tricks that cause me to think past the advertising before buying:

Associate the product with a term that connotes goodness. "Organic" has become one of those terms. It seems everything is becoming organic. Recently, I saw a promotion of "organic" toaster pastries at a local store. I guess the new product is designed to make me feel healthier when eating toaster pastries:-)

Make a previously irrelevant characteristic be a benefit. Now that the type of fat is important, "no trans fat" is being advertised for many food products, even if they never had it. I try make sure to think whether I want the food in the first place:-)

Focus on a desired future state. Less weight, better health, or an improved lifestyle are all appealing. Since a vision is energizing, it's sometimes easier be excited about the end state, and not remember all of the hard work needed to do it.

Although I am not immune to advertising, I am not yet compelled to buying organic, no trans fat foods that will improve my health. Perhaps I might consider the product if it would help me lose weight:-)

For more on Reflections and Musings, check back every Saturday for a new segment.

Friday, May 02, 2008

Since retiring in my forties in 2007, I've noticed that I've started experiencing some of the situations that I had with retirees from our company when I was still working. Here are two that happened to me so far:

Memory lapse for names. Since many retirees stay in the area, it is not uncommon to cross paths in social situations. In the past, I suspected that several retirees remembered me, but not my name. So I began to reintroduce myself whenever I met any retirees.

While it has only been seven months since retiring, it seems my company and the people are already a lifetime away. I have already experienced several situations where it took me several minutes or even another day for me to remember a colleague's name, especially if I didn't work with them on at least a weekly basis.

Looking younger. Often, retirees from our company appear about five years younger within a year of retiring. I noticed this phenomenon with several colleagues who retired before me. I attribute the change to a general reduction in stress.

I was flattered when a colleague made the same comment to me at a cookout with a former work group last week. It must be a real phenomenon:-)

Most of the company retirees I know are also doing well health wise and financially. Hopefully, I will have a similar experience in these areas also.

For more on Reaping the Rewards, check back every Friday for a new segment.

Thursday, May 01, 2008

How much should we pay for our child to go to college? One way I could decide is to compare the opportunity cost of tuition versus the increase in salary from a college degree. Teach A Child To Become A Millionaire shared how a one time investment of $20,500 could become $1 million in 41 years. With the average private college tuition around $22,000, the opportunity cost of a private college education is about $4.4 million at retirement. Therefore, a way to calculate the break even point is to estimate the increase in salary that could also provide $4.4 million at retirement.

Using a future value calculation, 41 years of saving $9000 per year at 10% is required to yield about $4.4 million at retirement. In other words, the break even salary increase for attending the average private college is $9000 over that for a high school graduate. Since the average salary of a college graduate is about $22,000 higher than a high school graduate, it appears the cost of the average private college degree is worth it.

From a purely financial viewpoint, the break even cost of a college education is about $2000 higher salary for each $5000 of tuition. As long as one achieves the average salary increase of $22,000 for a college graduate over a high school graduate, paying up to $55,000 for a college education is a break even proposition, financially.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial or education advice. Please consult a professional advisor.

About Me

My wealth goal is to create a guaranteed yearly income stream equal to my highest salary for my retirement years. While I have developed a strategy to do this,
I am interested how others are thinking of achieving financial security for retirement.
This blog is a summary of facts, ideas, discussions, and action plans to achieve that goal.

Disclaimer

This is a personal blog about my thoughts, experiences and ideas on building wealth. The contents of this blog are for informational purposes only. No content should be construed as financial advice. Commenters, advertisers and linked sites are entirely responsible for their own content and do not represent the views of My Wealth Builder. All financial decisions involve risks and results are not guaranteed. Always do your own research, due diligence and consult your own professional advisor before making any decision. My Wealth Builder assumes no liability with regard to financial results based on use of information from this blog.

If this blog contains any errors, misrepresentations, or omissions, please contact me or leave a comment to have the content corrected.

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Disclaimer:
This is a personal blog about my thoughts, experiences and ideas on building wealth. The contents of this blog are for informational purposes only. No content should be construed as financial advice. Commenters, advertisers and linked sites are entirely responsible for their own content and do not represent the views of My Wealth Builder. All financial decisions involve risks and results are not guaranteed. Always do your own research, due diligence and consult your own professional advisor before making any decision. My Wealth Builder assumes no liability with regard to financial results
based on use of information from this blog.

If this blog contains any errors, misrepresentations, or omissions, please contact me or leave a comment to have the content corrected.